Ryan Budget Plan Slashes Spending, Lowers Taxes
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The Fiscal Times
April 5, 2011

The Republican Party’s top budget chief on Tuesday unveiled a 10-year, $40 trillion budget plan that would dramatically shrink the size of the federal government over the next decade by eliminating nearly $6 trillion in spending while cutting $4 trillion from revenue by keeping all the Bush-era tax cuts for the next ten years.

Dubbing his plan “The Path to Prosperity,” – a title traditional Keynesian economists are certain to challenge – House Budget Committee chairman Paul Ryan, R-Wis., targeted two areas for two-thirds of his proposed cuts. The plan:

  • Converts the federal share of Medicaid funding, which provides health coverage for the poor, to a block grant, effectively freezing federal aid to the states; repeals Obama's health care reform law, including health insurance subsidies for the near-poor and small businesses.
  • Cuts all domestic discretionary spending programs other than defense nearly in half – with no adjustment for inflation--by eliminating or consolidating redundant programs.

In a speech to the American Enterprise Institute yesterday, Ryan said he channeled defense cuts into deficit reduction in the budget document, but the charts in his budget blueprint show a small increase in defense spending compared to current law, which is similar to what President Obama proposed in his 2012 budget.

The big winners in the plan would be high income earners and corporations whose top tax rate would be reduced from 35 to 25 percent.  But if Ryan and the Republicans simplify the tax code and eliminate tax breaks for individuals and corporations like General Electric, which dramatically reduced its taxes in 2010, the negative impact on revenue could be softened.  

Ryan's budget plan also maintains the $1.8 trillion in Bush-era tax cuts. That's why the overall deficit reduction in the plan compared to current law comes to only $1.6 trillion. Current law, according to the Congressional Budget Office analysis, includes allowing all the Bush-era tax cuts to expire after 2012. Compared to the 10-year plan in President Obama’s 2012 budget plan, the Ryan plan cuts projected deficits by $4.4 trillion.

“This is a jobs budget,” Ryan said, claiming his budget plan would grow the domestic economy by $1.5 trillion over the next decade and generate 2.5 millioni new jobs. “This is a path to prosperity, and it begins with reform of government.”

A separate Congressional Budget Office analysis, released late Tuesday afternoon, did not estimate the economic impact of the Ryan plan, but agreed “GDP and national income would probably be higher in the long term under the proposal than under the extended-baseline scenario,” which includes ending the Bush-era tax cuts extended last December at the end of 2012.  

Leading Democrats immediately attacked the plan as a “lopsided approach” to deficit reduction. “Behind the sunny rhetoric of reform, the Republican budget represents a rigid ideological agenda that extends tax cuts to the rich and powerful at the expense of the rest of America,” said Rep. Chris Van Hollen, D-Md., the ranking member of the Budget Committee. “The question is not whether to reduce the deficit, but how.”

The Republican deficit reduction plan offered a stark contrast to the president’s bi-partisan fiscal commission plan, which was co-authored by Democrat Erskine Bowles and former Republican senator Alan Simpson. That plan achieved $4 trillion in deficit reduction over the next decade by cutting spending equally from domestic discretionary and defense programs. It also raised taxes on well-to-do Americans in order to both raise revenue and offset reduced tax rates for corporations.

Overhauling the way America supports Medicare and Medicaid is key to the long-term budget cuts in the Ryan plan.  For Medicare, people who are now under the age of 55 would choose from a menu of private insurance  options once they turn 65 and receive means-tested support to purchase coverage. Medicare eligibility would slowly rise to 67 between 2022 and 2033.  Medicaid would be turned into block grants to the states, which would be left to design their own programs.

The CBO analysis of the Ryan proposal showed that federal contributions to Medicare, Medicaid, the state Children’s Health Insurance Program would fall from 10 percent of GDP today to 6 percent in 2030 and 5 percent in 2050. Under President Obama’s health care reform law, which expands government support for the uninsured, federal spending on health is projected to reach 15 percent of GDP by 2031, according to CBO.  

“The question is not if we reform Medicare; the question is when and how we reform Medicare,” Ryan said. “Do we save these programs now? . . . We don’t want to have a European-style austerity.”

The cuts to Medicare would have a substantial impact on out-of-pocket senior costs, according to CBO. “For a typical 65-year-old with average health spending enrolled in a plan with benefits similar to those currently provided by Medicare, by 2030, the beneficiary’s spending would be 68 percent of that benchmark under the proposal (compared to) 25 percent under the extended baseline.”

Democrats are already targeting Ryan’s Medicare privatization for their 2012 reelection campaign, claiming it would force seniors to pay higher out-of-pocket costs and self-ration care. “House Republicans should be honest with the American people and repeal giveaways to the oil companies and tax breaks for the ultra wealthy before forcing seniors to clip coupons if they need to see a doctor,” said Rep. Steve Israel, D-N.Y., chairman of the Democratic Congressional Campaign Committee. “Seniors who are paying a lifetime into Medicare deserve to count on the system they have earned.”

Ryan, who stressed that his Medicare plan would not affect anyone over 55, called Israel’s response “demagoguery.” “We’re giving the American people a choice,” he said.

Related Links:
Paul Ryan's Budget is a Positive Step (The Hill) 
Paul Ryan's Budget Would Slash $6 Trillion, Reform Entitlements, Cut Taxes (Politico) 
Nancy Pelosi Attacks Paul Ryan's Budget (The Weekly Standard)  

spent 25 years as a foreign correspondent, economics writer and investigative business reporter for the Chicago Tribune and other publications. He is the author of the 2004 book, The $800 Million Pill: The Truth Behind the Cost of New Drugs.